“So what am I buying here?” And better yet, “Is it worth it?” This is the fundamental question that goes through your customer’s mind when you make an offer. Some call it value for money. Others call it a consideration. But whatever they call it, it’s a judgmental weighing process.
As the one trying to make the sale, most of the time you will have to sweeten up your propositions to help them with their evaluation process. This means you will have to offer more value than the price they are paying…or, at least give them the perception of greater value. This is an educational process, basically the sales process.
Delivering Value Proposition in Your Business Model
So, what is a business model? And what is a value proposition? Simply stated, the business models is the process by which you deliver the value proposition. It includes your key partners, key activities, key resources, cost structure, value proposition, customer relationships, channels, customer segments, and revenue streams. Every one of these categories requires careful attention and, more importantly, the advice of people who have already done it.
But let’s not get ahead of ourselves. You are not just propositioning the customer. You are propositioning a string of customers at various different levels, especially in the CPG space. In order to get your product in front of the ultimate end-user consumer, you must “sell” several people in different layers of distribution. Each buys for a different reason.
Probably the biggest reason for the failure of new CPG product startups is ignoring this multifaceted value proposition. In each case you must ask, “What is the value proposition?” and in each case the answer is different. Keep this exercise in mind as you design your business.
What Makes Them Buy?
For instance, your distributors buy because you have promised them retailers who want to buy your products from them. Their sales managers buy because you have promised to help them hit the sales numbers they must achieve with your products. Their sale representatives buy because you have promised them a big commission on their sales. Your retailer buys because you have promised a quick turn on your products in their stores with customers coming in looking for them. Their clerks reorder and promote your products because you have taken them to lunch and told them how important they are to sales. And lastly, if you are fortunate enough to get this far, your consumers buy because you have promised a greater value than the money they will pay for your products. Whew! No simple value proposition here!
The third biggest reason for business failure is to create a business model that appears on paper to deliver a value proposition but is oversimplified. When it comes to betting your saving on a business, beware of modeling shortcuts. Sure it looks easy, just fill in the blanks, cut and paste, right? Wrong!
The devil is in the details and one size does not fit all. When we started our business, we thought the business model was to make award-winning wine and offer it at an unbeatable price. So why were we suddenly trying to please folks we hadn’t considered in ways we never imagined? Why were we suddenly doing a type of labor we never signed up for? Our business model was way too simple! That’s why. When we really got into it, we discovered the hard way what was actually required. Five years later, our business model was pretty much unrecognizable compared to our initial business model.
In his 2008 work on Business Model Ontology, Alexander Osterwalder proposed a Business Model Canvas. This is a handy, and now very popular, visual chart that provides a template for new and existing business models. It’s a great way to wrap your head around your value proposition, customers, finance and infrastructure. Over the years, new, more specific canvases have appeared for various niches. For a more detailed explanation of the Business Model Canvas, check out Wikipedia’s thoughtful summary.
With our real-world experience, here are some tips that will help you make your business model more practical:
These are your strategic allies. Basically, they are the answer to the question, “Who gets rich if I get rich?” A good place to start looking for them is your accounts payable. They are the ones you are paying the most to. Even before you start, identify them, contact them, and share your plans and how they will benefit. For us, it was the glass company.
Other strategic allies include your key buyers. Understand what it is about your products that will give them the advantage in the marketplace. And, as mentioned, there are many levels of buyers, all with differing needs. For instance, we found a strategic ally in Trader Joes, which at the time was startup like us with a fun theme we could embellish.
These include hidden resources. These resources may not be apparent, especially to a generation that believes they have to buy everything they need, but they include everything from empty rooms for offices, to repurposed equipment and furniture. They can also include friends and family who will help you get started.
We were able to use our resources effectively to reduce our start-up costs. At first, we used a door for a desk, a laundry room for an office, and even Bonnie’s mother and nephew helped out. We found that instead of expensive advertising, we could support non-profits giving their members a social reason to buy our products. All these were hidden resources that saved us plenty!
Surprisingly, you don’t have the luxury of setting your prices based on your costs. Generally, you have to solve backward from the shelf price demanded by the market. For CPG producers, category management has already determined what an offering in your category sells for more or less. That means you must discover costs of goods that fit that profile, allow for overhead, and still return a profit.
The second biggest reason for business failure that we’ve seen is neglecting to take into consideration the cost of sales. Most business models take into consideration the cost of goods, but not necessarily the full cost of sales. It’s one thing to sell a product in the retail market. It’s quite another to keep it selling on a regular basis in the retail market. This is where the cost can skyrocket.
For instance, if someone told us that we would have to have a representative on our payroll in every market to police our products on the retail shelf, check prices, do merchandising, and get the reorders for the retailer’s and the distributors, we would have told them other people in the distribution channel had a financial interest in selling our product and would take care those functions themselves. But boy, were we wrong!
We grossly underestimated the cost of sales and it almost killed us. Imagine, giving out a price before you knew the true cost of doing business. We didn’t get any help from the industry either because they too were in denial. It took us years to get back in the black!
Once you realize that you must provide a value at every level of the distribution channel, and once you realize what’s the cost of providing that value is, only then can you understand your true costs.
Startups tend to focus only on the value proposition they offer their consumers. Yes, it’s important and absolutely necessary, but it only gets you in the game. Now you have to play the game and there are many more players.
One value we offered our distributors was a pre-sale to one of their most important retail customers before that distributor even took our products. We made him more strategically powerful in his territory. Nothing about the value proposition we offered our consumer here!
A value we offered our distributer’s sales managers was a representative in his territory on our payroll who would make sales even if his own sales reps did not. Nothing about quality for price here!
The retailer saw our value proposition as a “Hot Mover”, an industry term for a product that moved quickly off the shelf and made them profits. And no, nothing about value for price here either!
We developed presentation materials that were specifically designed to convey the appropriate value proposition to all the stakeholders in our channel. It wasn’t until we finally figured out that we were going to have to do most of the work ourselves and were able to articulate that value, that sales finally took off.
This is the part of the model where most startups oversimplify the process. They think their customer (the retailer) will reorder and continue with their products. For most chain store buyers, it’s not the product so much as the person who represents the product and the customer service they provide. Can they be trusted? Will they be there if anything goes wrong. Will they pickup returns?
We once had a chain store buyer who wouldn’t take our products for two years. Every month we went dutifully to her office and made the presentation. Every month she said no. Finally, she said yes, and bought big! When we asked her why she didn’t buy from us earlier, she said, “I wanted to make sure you were going to come back!”
So, it’s not just listing the customers you expect in the business model canvas space provided. It’s understanding what that relationship looks like over time. In the highly competitive world of retail, your competition is looking to beat your time. And remember, your buyers have to like you, even if you have an outstanding value proposition.
What channels will you sell through? Will you sell directly to the consumer through e-commerce? Will you sell direct to big box stores? Will you sell to distributors who will sell to retailers? Or will you attempt to use all three?
What are the implications of direct to consumer e-commerce, for instance, when selling through distributors? The two are generally not compatible. If a retailer sees your product for one cent less than he can sell it for in his store with full mark up, he won’t touch it. Selling directly to a retailer pretty much prevents distributors from seeing a value proposition that is compelling. They want all the stores in their territory or they won’t carry your product at all! If you do sell direct to the big box store and they discontinue your products, you are done!
So, do your research ahead of time. We had to laugh. We once saw a business plan for a CPG product where the “Channels” category was simply filled in with, “Will be sold at retail,” as if that was a given. Ironically, the investors bought it and funded the offering with the most important piece, well, missing! And yes, it failed.
Another aspect of channels is “Where are you going to gain access to the market?” Part of your value proposition has to be why, how, and where is your access point. What is it about your proposition that is missing in the marketplace? What current unsolved problem do you address and what channels will best respond in what order and why?
What are the different groups of customers who will buy your product? How can you define them? What are their profiles? Where do they hang out and how will you target them? It’s one thing to know you have identified a need, but you may be surprised that your intended market doesn’t bite first. Meanwhile, you still have to produce a positive cash flow to pay your bills and stay in business.
So yes, defining a niche is always a good start, but remain flexible. There may be other segments that you may not have considered that are more interested in your product for reasons you hadn’t thought of.
When we started, we were going to produce our product in the standard 750ml wine bottle size. We thought we were after the value-minded shopper and wanted to hit the very best price possible which was with the smaller bottle. Imagine our surprise when a big buyer told us that the opportunity was at the larger 1.5L magnum size (even though the price would be higher).
In fact, for our first several years on the market, Barefoot was exclusively offered in the larger size! Our customer segment wasn’t necessarily the value shopper, but a 37-yr-old mom with 2 kids shopping for a staple wine. This was a customer segment we hadn’t considered until we attempted to gain market access.
Where does the money actually come from and under what conditions? In the CPG world, it’s not enough to bank on revenue from sales without considering the costs of those sales. Basically, is it worth it? Revenue from direct-to-consumer sales is probably the highest profit per sale because you have cut out the middleman. But if those sales are made online, they are single sales for the most part. Sales through distributors to retailers are lower profit, but they are volume sales which will help you cut costs on supplies and help profitability.
Revenue streams all have their attendant costs and complications whether its collections, bill backs, programming, or discounts. Be sure to think out each revenue stream with all its implications. What is the value proposition for you?
After years of barely breaking even in the bottled wine business, there was a big shortage of wine and we were sitting on a large supply due to a bulk purchase we had made earlier. The price of bulk wine skyrocket. Rather than save the wine for our own bottling needs, we decided to sell it in bulk for 400% more than we bought it for. Now that was an unforeseen revenue stream that never made it into our business model.
The value proposition is the very essence of business. The business model attempts to outline the process that delivers that value. Just filling in the blanks on a business model canvas without getting the experience of those who have actually achieved success is asking for trouble. Your proposition may be different for each “buyer.” Find out for both you and them what makes dollars and sense!